Blair's return of EU rebate will force spending cuts at home

Tony Blair's deal on the European Union budget has thrown the Government's future spending plans in Britain into jeopardy, it emerged last night.

Treasury officials confirmed that the agreement hammered out by the Prime Minister in Brussels, which saw Britain pledge to hand back around £7 billion of its rebate over seven years, would have a direct impact at home.

It also emerged that Mr Blair "freelanced" to strike the deal, on Friday night and early yesterday, without speaking directly to his Chancellor, Gordon Brown, at all.

The disclosures, again confirmed by Treasury officials, threatened to open up a fresh and damaging rift between the two men. Under the deal, which followed 17 hours of intensive talks, Mr Blair promised to surrender a further £1.7 billion of the rebate first secured by Margaret Thatcher in 1984, on top of a previous offer to hand back £5.5 billion.

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In return, he secured only a vague promise that the EU would "review" the controversial Common Agricultural Policy after Jacques Chirac, the French president, refused to give ground on the contentious issue of farm subsidies.

The deal provoked a storm of protest from opposition parties. William Hague, the shadow foreign secretary, said: "Seldom in the course of European negotiations has so much been surrendered for so little."

However, a more serious blow came when the Treasury confirmed that the money being handed over as part of the EU deal, which covers from 2007 to 2013, would have a direct impact on future government spending plans. Officials said there would be between £1 billion and £2 billion a year less than was currently being budgeted for to spend in Britain between 2008 and 2011.

This is the timeframe for spending on areas such as health, education, law and order, and transport, which will be formally decided in the three-year spending review planned for the summer of 2007.

"The size of the spending envelope for these years will be reduced," a Treasury official said.

Asked whether Mr Blair and Mr Brown had any direct contact in the hours leading up to the deal, the official replied: "No, they didn't."

The disclosure is further evidence of the disintegrating working relationship between Mr Blair and Mr Brown. The EU future funding deal is a particularly sensitive subject because, soon after it comes into operation, Mr Blair is expected to step down, with Mr Brown taking over.

Mr Blair was under pressure to secure a deal in Brussels to seal Britain's six-month presidency of the EU, which ends on January 1, and help reinforce his political legacy as a pro-European.

The Prime Minister insisted that the deal secured Europe's economic future, providing vital new funding for the latest - and poorest - EU member states.

"This is an agreement that allows Europe to move forward," Mr Blair told the BBC.

"It allows us to demonstrate the right solidarity with the new member states. For those of us who have championed enlargement, this is an important point.

"And, it has been extremely difficult. It has taken difficult compromises on behalf of everyone.

"I think it removes one major obstacle to Europe in moving forward in the right, modernising direction, and I'm pleased to have been able to reach agreement."

However, Mr Hague said: "This is a poor deal for Britain, for the EU, and for the developing world.

"The Government has spectacularly failed to achieve any such guarantees - merely vague promises - of a process of reform, in exchange for which they have surrendered £7 billion in Britain's rebate alone. Those vague promises have come with a very high price tag."

The agreement, which followed marathon sessions of talks in Brussels, was brokered with the help of Angela Merkel, the new German chancellor, who acted as go-between in talks with Mr Blair and Mr Chirac.

In total, the budget package is worth €862 billion (£584 billion), an increase on the €849 billion limit that had been proposed by the Prime Minister when the summit began on Thursday.